Académique Documents
Professionnel Documents
Culture Documents
Corporate Risk
Management
Learning Objectives
Principles Used in This Chapter
1. Five-Step Corporate Risk Management
Process
2. Managing Risk with Insurance Contracts
3. Managing Risk by Hedging with Forward
Contracts
4. Managing Risk with Exchange-Traded
Financial Derivatives
5. Valuing Options and Swaps
Key Terms
Copyright 2011 Pearson Prentice Hall. All rights reserved.
20-2
Learning Objectives
80% Hedged
80%
Unhedged Hedged
Price of Total Cost Total Total Refining Annual Profit/Loss Annual
Oil/bbl of Oil Revenues Costs Profits on Forward Contract Profits
=(A-
A B=Ax1m C D=$30x1m E=C+B+D G=E+F
$130)x1mx%Hedge
$110 $(110,000,000) $165,000,000 $(30,000,000) $25,000,000 $(16,000,000) $9,000,000
$(105,000,000)
$(110,000,000)
Total Cost of Crude Oil (1 million bbls)
$(115,000,000)
$(120,000,000)
$(125,000,000)
$(130,000,000)
$(135,000,000)
$(140,000,000)
$(145,000,000)
Price of Crude Oil in One Year
$10
$8
$6
$4
Profit
$2
$0
$0 $5 $10 $15 $20 $25 $30 $35 $40 $45
($2)
($4)
($6)
Future Stock Price
Given:
Current price of stock = $32
Exercise price = $25
Maturity = 90 days or 0.25 years
Variance in stock returns = .16
Risk-free rate =12% per annum
$10
$8
Profits, Exercise Price =$25
$6
$4
$2
$0
$0 $5 $10 $15 $20 $25 $30 $35 $40 $45
($2)
($4)
($6)
Stock Price
American options
Basis risk
Call options
Commodity futures
Credit risk
Currency swap
Derivative contract
European option
Exercise price
Financial futures
Futures contract
Hedging
Insurance
Interest rate swap
Futures margin
Marking to market
Notional principal
Option contract
Option expiration date
Option premium
Option writing
Put option
Risk profile
Self insurance
Spot contract
Strike price
Swap contract